Connecting planning methods to gain insight and accuracy

Before global positioning systems (GPS) made navigation foolproof, hikers or sailors wanting to identify their exact location would take two or more compass bearings on prominent landmarks and plotted their intersection. They would never have dreamed of using a single bearing to plot their location because this left an unacceptable degree of error—and perhaps risked steering them into a quagmire or rough waters.

Research undertaken by the advisory firm CEB suggests similar logic applies to budgeting, as discussed in this blog by Nina Sidibe. They found that few finance teams or business managers currently have much confidence in their version of a single point of navigation: mid-year expense forecasts. Sidibe called this “low ‘Cost IQ.’”

This is typified by poor insight into how growth impacts costs, little confidence about how current year spending affects the future, limited understanding of how costs inter-relate, and an inability to reallocate resources mid-year. Business people with low Cost IQ are pretty much lost, just like old-time hikers or sailors without a multiple points of reference. So what’s the answer?

Connecting multiple planning methods delivers results

CEB suggests that one approach is to combine different types of planning and budgeting models, such as traditional top-down or bottom-up budgeting, rolling forecasting, driver-based planning, and zero-based budgeting. Their research shows using multiple methodologies brings considerable benefits: companies in CEB’s top quartile for Cost IQ are 11 times more likely than those in the bottom quartile to have adopted three or more budgeting models.

Connecting different budgeting methodologies gives companies additional lines of sight into their costs. (Click to tweet) For instance, driver-based approaches to planning and budgeting give visibility into how operational variables affect expenses. Rolling reforecasts give better insight into next year’s resource needs and costs. And zero-basing budgeting, when and where it is appropriate, helps identify non-value adding activities that can be eliminated to free funds to reinvest in business renewal.

Dismissing the myths about using multiple methodologies

Although the benefits are considerable—and business managers seem to prefer budget models that are tailored to their needs and preferred way of planning—the CEB survey shows that only 30 percent of companies use three or more budgeting models. The most common combination is to use traditional budgeting, rolling forecasts, and driver-based models together; but even this is only done by 12 percent of respondents. The authors of the report highlighted two main areas of resistance:

Consulting costs. Some companies think they will need to hire more consultants to implement or improve planning and budgeting processes that use multiple methodologies. However, the research shows companies that only practice traditional budgeting are just as likely to retain consultants as those deploying multiple methods—35 percent and 33 percent, respectively.

Workload. Others fear using multiple methodologies will overburden FP&A teams. Yet CEB research found the average size of FP&A teams at companies using only traditional budgeting was 13.9 persons compared with 9.8 for companies using multi budgeting methodologies. This difference is possibly due to the latter group deploying the newer, more productive planning solutions needed to support driver-based models.

CEB concludes that tailoring planning and budgeting models to different business units and functions based on their operating attributes brings considerable benefits. What’s more, it can be achieved without overburdening the FP&A team, as many Anaplan customers will tell you. Many deploy driver-based models in those parts of the business with fluctuating demand and highly variable resource needs, while retaining more traditional models and rolling reforecasts for the remainder of the business.

An expert in the field of financial software, Richard Barrett spent half his career seeking out and working alongside entrepreneurs to maximize their companies’ values and the other half in commercial roles in the multinationals that subsequently acquired them. His experience spans both large and small companies in sportswear, express parcels, insurance and, in the last two decades, financial software. He first became involved in cost management and driver based planning in the late ‘80s, has taught and written on them for the UK’s Chartered Institute of Management Accounting and ended his career marketing them at ALG Software, BusinessObjects and SAP.
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